Characterisation: Its place in Contractual Analysis and Related Enquiries 
Contracts in Commercial Law Conference
James Allsop*
1	Contracts lie at the heart of commercial law.  This is not the place to discuss the legitimacy of the notion of a lex mercatoria, but to the extent that one can be said to exist, at least by reference to certain fundamental principles, lying at its foundation is the notion of the bargain and its enforcement.
2	How contracts are understood, how they are given meaning and how they are given operation are questions of technique and legal policy of the highest importance.  Often those processes of understanding, meaning and operation take place through interpretation and construction, fact-finding, and rule-application; but sometimes (and often at points of particular importance) there is something more happening – some evaluation or evaluative process – that has a close relationship with the process of ascription of meaning, and with fact-finding, but is something different, something further, something less precise and not amenable to logical expression or definition.  It is sometimes hidden or disguised by phrases such as ‘construction’ or ‘construction in a broad sense’, or by mere assertion with the suppression of any necessary premises, or by constructing a rule of application with a meaningless or concealed circuitous reference.  Generally this process is one where a value judgment is made by reference to ascribed meaning, found facts, an expressed principle or rule and the relevantly organised values that are to be brought to bear for the task.  It is those values that are often disguised, hidden and suppressed.  I have used and will use the word ‘characterisation’ to describe this process.  There is no magic in the word, and the process to which I will make reference will be different in different contexts.  It is the same word used by the Hon. William Gummow in a paper in 2013 concerned with the not dissimilar issue of the need to identify the major premise in many analyses – that is, to approach the matter at the appropriate level of abstraction.
3	The same process attends many concepts, whether deriving from the general law or statute, that closely affect contracts – concepts such as the fiduciary relationship or unconscionability.  Thus, in order to explain what I mean, I will go beyond discussing central contractual topics.
4	Let me begin by referring to a joint judgment of Dixon and Evatt JJ in A-G (NSW) v Perpetual Trustee dealing with a cy-près scheme.  The case concerned a bequest of a particular country property (‘Milly Milly’) to be used as a training farm for Australian orphan lads.  The bequest failed for impracticability, the farm being too small to generate enough income to support the intended enterprise.  The question was whether the intention that the particular property should be the place of training was an essential or indispensable condition, or whether it was simply a general charitable intention, which the particular provision for the training for orphan lads dominated.  Justices Dixon and Evatt said this about their task:
The truth is that the time-honoured distinction between essential and accidental characteristics is at the root of the test provided by the modern law for ascertaining whether a trust for charitable purposes, found incapable of literal execution according to its tenor, is nevertheless to be administered cy-près. In other departments of the law, however, similar distinctions are in use. Analogies may be seen in the question whether a contractual provision is of the essence; whether a term is a condition or a warranty; in the question whether invalid provisions of a statutory enactment or other instrument are severable or form part of an indivisible whole; in the question whether a law is mandatory or directory, and perhaps in the question whether the substantial purpose of creating a special power of appointment was to ensure a benefit to the objects so that they take in default of its exercise by the donee.
(One can thus see from the passage the range of subjects where a similar process is undertaken.)
In determining whether a wider charitable intention is the substantial purpose of the express directions by which the trust is constituted, the court is guided by the trust instrument and the conclusion is commonly said to depend on a question of construction. No doubt the terms of the document, together with any extrinsic circumstances admissible in aid of construction, form the materials for ascertaining whether the specific directions were animated by a wider charitable purpose which amounted to the true or substantial object of the trust. The process of extracting from such materials an intention implicit in the transaction which they evidence is properly called interpretation. But the construction of the language in which the trust is expressed seldom contributes much towards a solution. More is to be gained by an examination of the nature of the charitable trust itself and what is involved in the author's plan or project. In distinguishing between means and ends, between the dominant and the subsidiary, between the substance and the form, an understanding of the relative importance in fact of the component parts of the plan or purpose expressed in the trust is a first step towards forming an opinion of the respective values they possessed in the view of the testator or settlor. His forms of expression are by no means to be neglected. In the arrangement of his ideas and his use of terms the importance which he attached to the particular and to the general respectively may appear. The decided cases show that slight indications have at times been treated as enough to warrant a conclusion in favour of a wider charitable intention.
5	The passage reveals that the ascription of meaning to the words was only part of the process.  The balance was taken from an understanding of the whole human context.  Embedded within that were the values – the matters of importance which the testator’s context, language and humanity revealed as contributing to a value judgment of essentiality.  Their Honours used, amongst other examples, questions of contract to illustrate their point.  The identification of the essentiality of a provision or of the character of a breach in a contract is a task beyond (though requiring) an understanding of the meaning of the words in the relevant agreement.  It is an evaluation of essence or importance that can only be made once one identifies the values and considerations that attend the evaluation.  To use the word ‘values’ does not necessarily imply any high moral task – the values may be the brutally selfish commercial considerations attending the making and operating of the contract.
6	Justice Gummow, writing extra-judicially in 1999, referred to the above judgment in the context of statutory interpretation and the equity of the statute.  He referred to ‘a socially directed rule, expressed as an abstraction, to the infinite variety of human conduct revealed by the evidence in one case after another’.
7	One might next refer to the sometimes derided distinction between interpretation and construction.  In Life Insurance Company of Australia Ltd v Phillips Isaacs J, drawing on what Lindley LJ said in Chatenay v Brazilian Submarine Telegraph Co, distinguished between ‘interpretation’ involving the identification of meaning (being a factual linguistic exercise) and ‘construction’ involving the identification of the legal effect or effect to be given to them (being a legal question).
8	That distinction, especially as it affects the sometimes elusive distinction between fact and law, has been described by the High Court as ‘artificial, if not illusory’.  That criticism, however, was directed to the distinction insofar as it related to the giving of legal effect or legal meaning: the ‘notions of meaning and construction [being] interdependent’; and it was directed in particular towards the over-complexity the distinction caused in the domain of the categorisation of questions of fact or law.  Yet the conceptual distinction between interpretation and construction may be useful to assist in clarity of thought in legal theory and understanding legal function.  This is especially so the further construction (being the identification of legal effect) moves from the meaning identified.
9	The distinction does not fully capture what I want to discuss; both ‘interpretation’ and ‘construction’ in this context relate to the ascription of meaning and effect to words.  I wish to discuss a wider question that takes as its foundation the ascription of meaning to the contract, but is focused upon the evaluation and categorisation of circumstances or relationships by reference to values.
10	The process was also analysed by Professor Stone in his explanation of the limits of logical deduction in the expression and development of the common law.  He expressed the strong view that insistence of some to describe the judicial process as the operation solely of syllogistic logic, or as the ascription of meaning (by the synonymous processes of interpretation and construction), is likely to hide what is going on.  Stone referred to legal categories of meaningless reference, of concealed circuitous reference and indeterminate reference.  Some examples, to some of which I will return, are: the ‘substance of the contract’ for the purposes of frustration or repudiation (akin to the notion of ‘jurisdictional error’ in public law); the distinction between capital and income (all being categories of meaningless reference); and duty of care, causation and the imposition of the conclusion of unjust enrichment or of the obligation to give restitution (categories of concealed circuitous or indeterminate reference).
11	I would like to begin with the fiduciary relationship.  It is a key component of the organisation of commercial life.  That is because its key ingredients – trust, reliance and joint venture – lie at the heart of many commercial relationships.  There is nothing antagonistic or awkward in the relationship between contract, fiduciary relationship and commerce.  Commerce, of course, has an inherently selfish character: that is, the search for commercial gain.  But it is far more than that.  Perhaps it reflects one of the great complexities and subtleties of life that, whilst, to a degree, it has this selfish character, it is also the vehicle and the catalyst for far nobler aspirations and themes.  This is so because hard-faced greed does not promote long term commercial success; such is built, as often as not, on mutual respect, decency and honesty.  Litigation lawyers (including judges and arbitrators) sometimes scoff at this.  But they only see the scrapping unpleasantness of failure and the often bad manners of litigation, or ‘dispute resolution’ in whatever form.  They often overlook the fact that the vast majority of commercial arrangements do not end in tears, but rest on reciprocity, mutual self-interest and a requisite degree of trust.
12	From the fiduciary relationship, I will move to the notion of unconscionability in commerce, to the doctrine of penalties, to the nature of insurance and how the process of characterisation, and in particular, the values attending the evaluation, should be recognised in both questions.  With that background I will move to contractual terms.
13	The fiduciary relationship is not capable of precise definition.  The conclusion of its existence is not reached by logical deduction alone.  Its existence or presence will, however, lead to certain clear rules being engaged.  The existence of the relationship is, of course, bound up with the enquiry as to its scope.  The identification of the existence and scope of the relationship is assisted by conclusions drawn from the language and intent of the parties, properly interpreted and construed.  It is also assisted by recognising existing and accepted categories: partner, joint venturer, agent, director, solicitor, financial adviser.  None of those categories assists with any logical progression of thought; but all assist with understanding the character of the relationship.  That character, to use the enduring judgment of Mason J in Hospital Products, is one that is based on trust, confidence, and confidential relations in which one person has power over the interests of another who by that is vulnerable; such power giving the fiduciary a special opportunity to exercise the power in a way that will abuse the trust the vulnerable principal has placed in her.  The nature of the relationship may be representative; or it and the vulnerability may rest in the control of property of another – in a custodianship sense.  The judgment of Mason J is a clear statement of the values that are brought to bear in the evaluation and conclusion as to whether a particular relationship should be characterised as fiduciary.
14	The inter-relationship between, and co-existence of, contract and the fiduciary relationship is axiomatic; further, this relationship often occurs in a commercial context: agency, partnership and joint venture being obvious examples.
15	This relationship and co-existence of contract and the fiduciary relationship provides the focus for the way construction and interpretation and characterisation intersect.  Here, I use the phrase ‘construction and interpretation’, as it is so often used in judgments, as a combined phrase to express the process of ascription of meaning (the ‘proper construction’) of a contract.  I do not use it in the broader way earlier referred to that delineates the ascription of meaning (interpretation) and the giving of legal effect (construction – in this context sometimes being wide enough to include characterisation).
16	In Hospital Products, Mason J said the following about the inter-relationship, where the contract provides the foundation for the relationship:
In these situations it is the contractual foundation which is all-important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction.
17	That place for the contract properly interpreted does not, however, sweep away the principal task of characterisation.  In John Alexander’s Clubs the High Court referred to the late John Lehane’s extra-judicial paper on ‘Fiduciaries in a Commercial Context’ in saying the following:
…[T]he reason why commercial transactions falling outside the accepted traditional categories of fiduciary relationship often do not give rise to fiduciary duties is not that they are ‘commercial’ in nature, but that they do not meet the criteria for characterisation as fiduciary in nature.
18	The process of evaluation as to the nature and character of the relationship by reference to the values and considerations means that parties cannot in their contract (and here construction and interpretation (meaning) and characterisation clash) simply deny by a term the consequences of characterisation by reference to the legal incidents of their relationship.  If it is a partnership, a joint venture or an advisory relationship of trust and confidence, a clause denying the fiduciary relationship or responsibility will not avail.  As Finn J said in South Sydney v News:
It is legitimate for parties to avoid the ‘unwanted consequences’ of a particular category of legal relationship by seeking to cast it in a form that takes it outside that category of relationship:  Colbron v St Bees Island Pty Ltd (1995) 56 FCR 303 at 314. But whether or not they are successful in achieving that end does not depend simply upon whether, in an express provision of their agreement, they attribute or deny to their relationship a particular legal character - be this, for example, employer and employee: Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385; principal and principal or principal and agent: Board of Trade v Hammond Elevator Co, above; or partners: Ex parte Delhasse; In re Megevand (1878) 7 Ch D 511. The parties cannot by the mere device of labelling, no matter how genuinely intentioned, either confer a particular legal character on a relationship that it does not possess or deny it a character that it does possess: Ex parte Delhasse, above, at 532; see 2A Corpus Juris Secundum, ‘Agency’, §7; see also the observations of Lord Denning in Massey v Crown Life Insurance Co quoted in the Australian Mutual Provident Society case, above, at 389. 
19	This being so, it might be thought debatable that one can exclude a fiduciary relationship (otherwise present by the incidents of the legal relationship that has been created) by a clause that stated the relationship to be non-fiduciary, as in the Citigroup Case.
20	Nor, with respect, is it adequate to limit the process of characterisation of the incidents of a relationship to one of adequacy of relief by way of contractual terms, as appears to have been done by the New South Wales Court of Appeal in Streetscape.
21	I turn to unconscionability.  The notions of conscience and unconscionability pervade Equity; they were the insight and guiding force of Equity acting in personam.  They were a basis for setting aside or refusing to enforce certain transactions and contracts. They were also a thematic feature of Equity, reflecting a standard exacted of parties, often in a commercial context: estoppel, mistake, the constructive trust, defences to specific performance.
22	By force of statute in Australia the notion has been directly transposed to business relationships.  The Competition and Consumer Act 2010 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) both contain provisions which prohibit a person from engaging in unconscionable conduct in trade and commerce in connection with the supply or acquisition, or possible supply or acquisition, of goods or services or financial services.  The Parliament has set out in those provisions not only a standard, but also the values (or at least some of them) by reference to which courts will be expected to evaluate the conduct in question.  For instance, s 22 of the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act) identifies the following considerations as relevant to the evaluation: the relative strengths of the bargaining position of the parties, the reasonable necessity of terms for the protection of legitimate interests, the understanding and comprehension of the parties of the documentation, the exertion of pressure or use of unfair tactics, the relative price for equivalent goods or services, comparative behaviour with other parties, requirements of legislative or code standards, undisclosed intended conduct, the extent of negotiation, the right of one side to vary terms, and good faith.
23	All of these are, of course, broad conceptions (and evaluative in themselves) but they conform to a requirement of honest and decent behaviour, and a rejection of taking advantage of vulnerability, in a way that strikes a standard of an Australian business conscience.
24	The provisions offer Australian courts a fresh start to develop a coherent body of principle concerned with fair dealing, conscience and commerce.  The conceptions are hardly new or foreign to common law or Equity.  It will be important to recognise the nature of the judicial task involved in the development of the principles guiding, and the content of, the statutory standard.  It is, first, a matter of statutory interpretation and application.  That process is, however, not one limited to a choice of synonyms and distilled epitomes.  It will not be helpful to seek to reduce the judicial method to a catchword, a phrase, a necessary precondition (such as ‘moral obloquy’ or ‘moral obliquity’ or ‘a predatory state of mind’).  The assessment of unconscionability involves characterisation of conduct as against conscience, by reference to the values organised for the task.  It is a process of the kind discussed by Dixon and Evatt JJ in A-G (NSW) v Perpetual Trustee  and by Gummow J in the paper earlier referred to.  It is the creation of an Australian business conscience.  It will necessarily draw from, but is not to be limited by, the equitable roots of the expression.  The standards from time to time expected of people in Equity will form part of the system of values against which such value judgment or characterisation is made.  The factors in the statute can be summarised by a concern with fairness and equality, prevention of advantage being taken of ignorance or vulnerability, and good faith and fair dealing.  The evaluation will not be a formless void of personal intuition. 
25	The working through of what a modern Australian commercial, business or trade conscience contains and requires will take its inspiration and direction from our legal heritage in Equity and the common law, and from modern social and commercial legal values identified by Australian Parliaments and courts.  The evaluation of conduct will be made by the judicial technique referred to by Dixon CJ, McTiernan and Kitto JJ in Jenyns v Public Curator, being Equity’s precise examination of all relevant facts and relations to reach a determination of the justice of the case.  It does not involve personal intuitive assertion.  It is an evaluation which must be reasoned and enunciated by reference to the values and norms recognised by the text, structure and context of the legislation, and by reference to the legal values of the common law and Equity and perceived community values, made against an assessment of all connected circumstances.  The evaluation includes a recognition of the deep and abiding requirement of honesty in behaviour; a rejection of trickery or sharp practice; fairness when dealing with consumers; the central importance of the faithful performance of bargains and promises freely made; the protection of those whose vulnerability as to the protection of their own interests places them in a position that calls for a just legal system to respond for their protection, especially from those who would victimise, predate or take advantage; a recognition that inequality of bargaining power can (but not always) be used in a way that is contrary to fair dealing or conscience, in particular having in mind the explicit and implicit assumptions or impositions of risk attending any transaction and the legitimate business interests of the parties; the importance of a reasonable degree of certainty in commercial transactions; the reversibility of enrichments unjustly received; the importance of behaviour in a business and consumer context that exhibits good faith and fair dealing; and the conduct of an equitable and certain judicial system that is not a harbour for idiosyncratic or personal moral judgment and the exercise of power and discretion based thereon.
26	The variety of considerations that may affect the assessment of unconscionability in this process of characterisation only reflects the variety and richness of commercial life.  It should be emphasised, however, that faithfulness or fidelity to a bargain freely and fairly made should be seen as a central aspect of legal policy and commercial law.  It binds commerce; it engenders trust; it is a core element of decency in commerce; and it gives life and content to the other considerations that attend the qualifications to it that focus on whether the bargain was free or fair in its making or enforcement.
27	In any given case, the conclusion as to what is, or is not, against conscience may be contestable.  That is inevitable given that the standard is based on a broad expression of values and norms.  Thus, any agonised search for definition, for distilled epitome or for shorthand of broad social norms and general principles will lead to disappointment, to a sense of futility, and to the likelihood of error.  The evaluation is not a process of deductive reasoning predicated upon the presence or absence of fixed elements or fixed rules.  It is an evaluation of business behaviour (conduct in trade or commerce) as to whether it warrants the characterisation of unconscionable, in light of the values and norms recognised by the statute.
28	Let me turn to the doctrine of penalties.  I should be both brief and careful.  Brief because others have directed themselves in more detail to this; careful because I have a judgment going to the High Court on the topic.
29	There is now an unfortunate division of opinion between the Supreme Court of the United Kingdom and the High Court of Australia in both the underlying conception of the penalty and the doctrine’s operation.  In Cavendish Square Holdings the Supreme Court declined to approach the doctrine otherwise than as based on breach of contract.  In so doing, it rejected the approach taken by the High Court in Andrews.  Given that the High Court will no doubt be considering such questions on the appeal in Paciocco, it would not be appropriate for me to venture a view.  I would only like to say that whatever framework of analysis is to be preferred, the doctrine must be given a modern conceptual justification with coherent attendant values.  Central to this is the notion of compensation and how one approaches its assessment in the application of the doctrine.  Does the penalties doctrine work on a simple reflex of the computation of damages according to Hadley v Baxendale?  Is it a notion of being out of all proportion with any legitimate interest of the other party?  If the latter, questions of evaluation and assessment – characterisation – arise.  Compulsion or threat by a contractual term is surely not necessarily wrong; for instance, a term to discourage fraud or other reprehensible conduct by financial incentive can be seen to be a legal aim worthy of support, not attack.  Thus, a contractual provision in a joint venture that required a party to disgorge any profit on an opportunity taken, along the lines of the majority in Phipps v Boardman, would surely not be penal.  That would be so because it was not out of proportion to any legitimate interest of the other party.  But if a penalty is a reflex of compensation, what is the justification for accepting the clause as legitimate?
30	The penalties’ doctrine cannot work as a rule based paradigm.  It is too replete with circularity as a category of circuitous reference.  The circularity recedes when one has a clear justification for a modern doctrine and a clear conception of the attendant values to apply in the process of characterisation.
31	Let me turn to insurance briefly.  The nature of insurance is a deceptively simple concept.  We deal with it every day yet it is a concept that is not easily defined by logical expression; and is said to be ‘elusive’.  The ‘working definition’ given over 100 years ago by Channell J in Prudential Insurance Co v Inland Revenue Commissioners is still of utility.  It was a definition given in the context of whether something was life insurance (and stampable as such) or a financial instrument (and stampable as a ‘Mortgage, Bond, Debenture, Covenant’).
32	The ‘definition’ of the contract of insurance is one whereby, for a monetary consideration (the premium), the person agrees to pay to the other (the insured) a sum of money or some benefit upon the occurrence of one or more specified events.  But, so put, one does not need to struggle to be able to identify relationships or commercial transactions that meet the definition, but which one would not call insurance.  Each element – premium, promise to pay, sum of money or other benefit, upon a specified event – needs some elaboration, not in terms of further definitions, but in terms of purpose.  In particular, the notion of the sharing of risk to spread losses of unhoped for, but possible, contingencies that may or may not happen.  This purpose affects the calculation of the premium, which is not intended to be equivalent to the value of performance.  So a standing contract to provide a service (repair a machine, for instance) is not insurance, as the repairman is not sharing a risk, but providing a service.  But proper characterisation can be elusive, as shown by a series of cases from the early 20th century as to whether legal relationships were life insurance or investments, and cases dealing with whether insurance is one type or another, such as marine or non-marine, or trade credit insurance or not.  
33	The process of characterisation was referred to by Windeyer J in one of those cases in 1959 as follows:
Whether or not a particular transaction is denoted by some description is a question which not infrequently arises in connexion with enactments which dictate conditions governing transactions of that description, or which impose fiscal burdens such as stamp duties of different amounts upon instruments of different descriptions. In the absence of express statutory definition these questions necessarily turn upon what is the accepted connotation of the description in question…its meaning in ‘common parlance among such persons as were conversant with insurance’…and ‘as understood commonly in the business world, by insurance companies, and by other people’.
34	Thus, meaning approaches characterisation – but it is something more than definition.  It is that which is perceived by those familiar with the activity that implicitly characterises the relationship as falling within the connotation of the word as understood in the commercial milieu in which they work.  The boundaries and structure of language carry with them the divisions of ideas and values in the commercial field in question.  As Lord Devlin said in Chow Yoong Hong the business of buying bills at a discount was distinct in nature and character from money lending.  That was so not because of some definitional difference, but because the importance of the differences of form of the activities to the commercial community made it so; notwithstanding the equivalence of the object – the raising of money.
35	I turn now to contractual terms and breach.  As Dixon and Evatt JJ said in A-G (NSW) v Perpetual Trustee, one of the analogous circumstances to that with which they were dealing was the question whether a contractual provision is ‘of the essence’.  This is exemplified by what Jordan CJ said in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd:
The test of essentiality is whether it appears from the general nature of the contract considered as a whole, or from some particular term or terms, that the promise is of such importance to the promisee that he would not have entered into the contract unless he had been assured of strict or substantial performance of the promise…and that this ought to have been apparent to the promisor. 
36	Again, it looks like construction (that is, ascription of meaning), but there is something more; it is an evaluation of importance based, of course, on what is the meaning of the contract, but in the context of the general nature of the contract as a whole, which inevitably brings a range of contextual values to bear.  As the plurality said in Koompahtoo, in describing the process as one of construction, it is the intention of the parties, expressed in their language understood in the context of the relationship and the commercial purpose it served, that determines essentiality.
37	The leaning of the courts towards construing terms as intermediate rather than as essential is informed by the values of justice and fairness in the avoidance of termination on technical or unmeritorious grounds.  This illuminates the process of assessing what is serious and what is not as one being based significantly on values.  As the plurality recognised in Koompahtoo, the sufficiency of seriousness, indicated by metaphor in ‘going to the root of the contract’, leads to a ‘conclusory description’ that: 
takes account of the nature of the contract and the relationship it creates, the nature of the term, the kind and degree of the breach, and the consequences of the breach for the other party….[T]he adequacy of damages as a remedy may be a material factor in deciding whether the breach goes to the root of the contract.
38	It can be accepted that this process rests primarily upon a construction of the contract.  But clearly it involves more than ascription of meaning – it involves an assessment of the fairness and commercial justice in what has happened, set against what the parties have agreed, in their commercial milieu.  As Buckley LJ said in Decro-Wall (cited in Koompahtoo) seeking to capture what great common lawyers had been saying for a century:
Will the consequences of the breach be such as it would be unfair to the injured party to hold him to his contract and leave him to his remedy in damages…?
39	The test has been variously expressed: ‘root of the contract’, ‘unfair’, ‘fair carrying out of the bargain as a whole’ and ‘in a vital respect’.  The ‘tests’ thus expressed have been criticised as circular and empty.  I do not agree.  The tests really reduce to one variously expressed concept, which for Australia can be seen in Koompahtoo and Ankar.  However it is expressed, the essential element is the deprivation of a benefit or an entitlement, or the imposition of a burden, sufficiently serious as to change the character of the grant to, or of the obligations or entitlements of, the other party to the contract to such a degree that it can be said to be a commercially different bargain.
40	The test is not definitional; it is based on a characterisation of the seriousness of the breach, by understanding the nature and commercial operation of the contract as a whole and coming to an evaluation of the seriousness of the breach by reference to all the circumstances and to commercial fairness.  This relevance of commercial fairness or justice is echoed in the cognate enquiry as to frustration.  In Hirji Mulji v Cheong Yue Steamship Co Ltd,  Lord Sumner said that frustration was ‘a device, by which the rules as to absolute contracts are reconciled with a special exception which justice demands’.  
41	The following can be seen to be relevant considerations in the assessment of seriousness of breach: the adequacy of damages and the ability to quantify damages; any apparent injustice, including unjust enrichment of the innocent party, should that party terminate; the possibility of forfeiture by the party in breach; the uncertainty or not surrounding future compliance with the contract; the history of the standard of contractual compliance hitherto; the expressed or otherwise evident attitude of the party in breach to its obligations; the ability of either party to cure the breach; and, perhaps, the extent to which the behaviour of the party in breach comports with standards of good faith and fair dealing.  These matters may not be exhaustive, but they may, in any given case, assist in an assessment of a breach as whether of sufficient seriousness or not to warrant termination.  This is characterisation; a search for some more particularly expressed positive rule is both pointless and likely to engender complexity and confusion.  This is what Viscount Haldane was referring to in the context of the related evaluative enquiry concerning frustration when he said in Bank Line Limited v Arthur Capel & Co:
whether frustration has taken place…depends on the circumstances to which the principle is to be applied, rather than on abstract considerations.
42	The significance and importance of broader considerations, such as the nature of the commerce involved, to the Court’s assessment of serious breach may be briefly illustrated by reference to the House of Lords’ decision in The ‘Nanfri’.  There, a dispute had arisen between owners and charterers over the permissibility of certain deductions from time charter hire and over the validity of the owners’ actions in declaring that it would not allow certain forms of bills of lading (freight pre-paid bills) to be signed.  The focus of the judgment, as it concerned the owners’ conduct, was upon the assessment of seriousness of breach – a question which was answered by reference to broad commercial considerations such as the nature of the parties’ trading relationship, the commercial purpose of the contract, and the potential impact of the breach upon future commercial relations of the parties.  Lord Wilberforce referred directly to the fact that had the threatened breach occurred, ‘the charters would have become useless for the purpose for which they were granted’, a number of ‘pending transactions’ would be affected which would mean that the charterers ‘might have lost the whole benefit’ of the bargain, there was a likelihood that the charterers would become black-listed from future contracts, and finally that, when viewed as a whole, the owners’ response was ‘disproportionate to the intended effect’ .  It was by reference to these assessments that his Lordship concluded that the breach ‘went to the root of the contract’ and was therefore an action amounting to repudiation.  This same approach was adopted by Lord Fraser of Tullybelton, who focused upon the fact that the owners’ threat, if carried out, ‘would have been ruinous to [the charterer’s] trade’ and their reputation ‘would be very seriously damaged’ such that they would ‘probably have been unable to obtain business for the vessels’.  Again, it was because of these considerations that his Honour concluded that the breach went to the ‘root of the contract’ and was repudiatory. 
43	Characterisation, and the process involved in evaluating the seriousness of a departure from a contractual standard or in assessing the essentiality or otherwise of terms, is framed by an understanding of the context (including commercial context) and imperatives of a given contract or type of contract.  It is from that understanding that the relevant values are drawn.  That understanding is also essential to the proper interpretation and construction of the contract (in the sense of ascription of meaning).  That is because understanding the values and imperatives is essential to any decision about what the parties meant by the words they used.  Examples of masterly understanding of the commercial nature and imperatives of particular types of contract can be seen in the opening paragraph of Lord Bingham’s speech in The ‘Hill Harmony’ describing how time charters work, or by Lord Hobhouse in the same case describing the different commercial imperatives of a time charter and voyage charter, or by Lord Mustill in The ‘Gregos’ describing the commercial pressures in the business of shipping and how they affect time and voyage charters.
44	Another task, similar in nature, was undertaken by the House of Lords in The ‘Achilleas’ in qualifying recovery under Hadley v Baxendale.  Lord Hoffman referred to the ‘context, surrounding circumstances or general understanding in the relevant market [showing] that a party would not reasonably have been regarded as assuming responsibility for such losses’.  This involved deciding the ‘kind’ and ‘type’ of loss for which the contract breaker ought fairly to be taken to have accepted responsibility.  Whilst other members of the House constructed the analysis by reference to the intention of the parties, ultimately the reasoning was common: from an understanding of how the market worked, an evaluation was made of the just and fair assumption of liability.  Interestingly, one appellate judge in that case who had a deep understanding of the market (Rix LJ) came to the opposite evaluative conclusion, reflecting the contestability of such an evaluation. 
45	Dare one say it, but implicit in many of these evaluations is not only the detailed understanding of commercial judges of the milieu in question, but also an imposition of a standard of behaviour.  As Potter LJ said for the Court of Appeal in The ‘Happy Day’ in dealing with how a charterer should be taken to behave for the law of waiver in the face of a Notice of Readiness issued by the master and known to be invalid by the charterer:
An assumption of lack of fair dealing of that kind is not one which it seems to me appropriate to make on an objective consideration of the parties’ intentions for the purposes of the doctrine of waiver.
46	These cases demonstrate the significance which has been placed on the commercial milieu of the transaction and a degree of recognition within the courts that questions such as seriousness of breach cannot (at least in every case) be determined by exclusive reference to, and interpretation of, the text of the agreement.  Broader commercial considerations must be taken into account, including the impact of one party’s behaviour upon the other; the commercial purpose for which the agreement was entered into; the legitimate commercial expectations of the parties; and the fairness of a party’s actions.  Such things cannot be condensed into concise propositions, but must be evaluated within the factually specific circumstance of each case.  As has been recently stated by Etherton LJ ‘there is a danger in attempts to clarify the application of a legal principle by a series of propositions derived from cases decided on their own particular facts…Whether or not there has been a repudiatory breach is highly fact sensitive.  That is why comparison with other cases is of limited value.’  Or as Gaudron J said in Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd: ‘There is no very precise formulation of the necessary import of conduct before it will be characterised as repudiatory’.
47	If I may be forgiven a bad pun at this stage of the discussion, the root or essence of what I wish to say is that the search for rules that express, in value-free language, positive law in the field of regulating dynamic human social activity such as agreements, is fraught with inadequacy, and, if pushed relentlessly, likely to lead to over-complexity and incoherence.  The parties’ meaning, expressed in the written words they have used, is central but it rarely exhausts the universe of discourse of relevant legal reasoning.  Usually there is something more.  It may be that this can be seen as the necessary open texture in many legal rules.
48	I have called the process characterisation.  It is the evaluation of circumstances to draw a conclusion, often a taxonomical conclusion, and often one that is contestable, about broadly expressed principles anchored in the honest and fair undertaking of business.  That process always calls upon a body of values – private and public – that inform the logical and intuitive reasoning process involved.  It is rooted in or founded on ascription of meaning and the positive legal rules attending the relevant subject.  It is not a process detached from an ordered legal framework and method.  But, it is an evaluative process governed and guided by the context and relevant values attending the question and the contractual milieu in question.
49	If the process is hidden or if there is a refusal to recognise its existence, values and attending norms fall away, meaningless ever-more precise positive tests of ever-ascending particularity are framed, leading to complexity, and bare assertion is met by bare counter assertion.
50	Modern commercial law, as a part of a global commercial community, rests on principle and values (in particular, the values of honest fair dealing) rather than minute rule making.  A system based on principle and values requires clear recognition and enunciation of the process of evaluation or characterisation – a process based on the ascription of meaning of the parties and, where called for, the evaluation or characterisation of relationships and conduct by reference to the organised values that conform with, or inform, the relevant principle.  That process will take its place in the legal framework of relevant and related rules.  Its separate existence as a conceptual process should, however, be recognised in order that the values being brought to bear can be understood.